CHECK-LIST FOR A DEFINITION OF TERRORISM FOR THE PURPOSE OF COMPENSATION
This check-list is meant to help private sector entities as well as governments involved in terrorism compensation to define terrorist acts and criteria relevant to determine which terrorist acts can be indemnified, be it through private insurance mechanisms or through other compensation mechanisms. This check-list is illustrative, and neither binding nor exhaustive; it can be adapted by the various parties concerned to mirror specific market and regulatory frameworks or policy objectives.
The following criteria may be considered when defining terrorism acts for the purpose of compensation.
A) Elements of Definition of a Terrorist Act, which could include:
Criterion 1 - Means and Effects
A terrorist act is:
• An act, including but not limited to the use of force or violence, causing serious harm to human life, or to tangible or intangible property,
• Or a threat thereof entailing serious2 harm;
Criterion 2 - Intention
A terrorist act is committed or threatened:
• With the intent to influence or destabilize any government or public entity and/or to provoke fear and insecurity in all or part of the population;
• In support of a political, religious, ethnic, ideological or similar goal.
B) Factors of Insurability, which could include:
Criterion 3 - Technical Insurability, including in principle:
• Assessability (probability and severity of losses should be quantifiable);
• Randomness (the time at which the insured event occurs should be unpredictable when the policy is underwritten, and the occurrence itself should be independent of the will of the insured);
• Mutuality (numerous persons exposed to a given hazard should be able to join together to form a risk community within which the risk is shared and diversified).
Criterion 4 - Economic Insurability3, which could depend on the following elements:
• Magnitude of potential losses: it should in principle not exceed the capacity of the private insurance/reinsurance market or the capacity of a mix of private and public multi-layer mechanisms when these exist. The insurability of the risk will be assessed against the maximum aggregate amount of funds made available by the various potential stakeholders (insurers, reinsurers and, possibly, pooling mechanisms allowing (inter)national spreading of risks, and governments) reflecting their respective capacity. The quantitative segmentation of risks, i.e. The threshold/sub limits (the nature and the amount of sub-limits, and the basis on which they should be calculated) should be defined ex ante;
• Nature of the potential losses: to be insurable, potential losses should correspond to the lines of business that the available insurance mechanisms are able to cover. The list of business lines to be covered should be defined through an ex-ante qualitative segmentation of risks.
• Price of cover: for the risk to be insurable, it should be possible to set an adequate and actuarially fair insurance premium;
Criterion 5 - Legal/Regulatory Insurability
Regulatory authorities may decide that a given risk, or type of risk (e.g. worker compensation, business interruption), is -- explicitly or implicitly -- defined as insurable, for instance through a certification procedure and/or if insurance against this risk is made compulsory. In this case, a risk may be labelled as insurable while other insurability criteria may not be met.
C) Factors of Compensability (Insurance Excluded), which could include:
Criterion 6 - Compensability by the State
States need to decide about the possibility of compensation on the basis of their own public policy concerns. The risk should not exceed in magnitude the maximum financial involvement that the State is able or willing to supply for the compensation of losses entailed by terrorism.
Criterion 7 - Compensability through Non-Governmental Mechanisms
The technical characteristics of the risk should allow it to be covered through financial mechanisms other than insurance, for instance bonds placed on capital markets.